What happened to our supermarkets: negative consequences of errors of scale and financialization

“Didn’t it ever seem strange to you that, if you bought your ticket ahead of time, your travel agency obviously sold it to you below cost? Did you really think that the jet fuel to the Riviera Maya plus the all-inclusive hotel could cost 100€? And what can we say about the products at your supermarket? Why are they so much cheaper than at small stores or farmer’s markets? And what about job and education announcements? How is it that suddenly the “Financial Director” is more important than the Director, the Chief of Administration, or the product creators? Have you looked closely at your “low-cost” sofa?

All these are symptoms of the financialization of commerce. As of a certain point, the benefits were no longer fundamentally in the difference between the purchase price and the sale price. They were financial benefits. It’s a simple system: it’s based on the difference in time between the moment they charged you at the cash register and the moment your supermarket, your furniture store, or your travel agency paid their providers.

During that period, they have “floating” money available to them. Taken together, the faster the turnover at the supermarket or whatever business it is, the juicier the investment. That’s the heart of the “financial dimension of the business” they taught us about in school.

What’s interesting is that as of a certain point, the same point when it stopped being profitable for financial capital to invest in production, the main business of the distribution chains became, purely and simply, capturing funds for the financial system. At first, the engine driving the process was that the financial margins were better than the commercial ones the market was giving, but the strategists at the big distributors would soon see the opportunity to drive small competitiors out of the market, by selling at or below cost. The business could free itself of competition from small business, gain even more scale, and grow its pools of floating capital to the point where it could get into highly-paid financial markets.

That’s why, since the Eighties, big-box stores, hypermarkets, fast-food chains, furniture chains, bookstore chains, travel agencies, and more, have expanded their reach all over the world. The big distribution chains clearly seem to be more productive, and why not, if they can sell for less? But, it’s just a mirage: they’re only there to capture funds. Their growth is not the product of the market, but rather loot from its destruction.

But let’s look back and see the consequences of this race for scale born of the financialization of distribution: for years, consumers have been able to buy cheaply; however, the business community has been irreparably damaged, and the distribution businesses themselves (including some cooperatives) have become terribly dependent on a financial market that, today, simply isn’t going to cover them. More than a few have gone under. Others are having a bad time of it.

Because, let’s not forget: those funds that the financial system obtained were not reinvested in production, but rather in speculation. Excessive scale, in fact, was draining capital from the productive sector, while at the same time,complaining about “smallholdings of small industrial businesses.” And when they invested in businesses, it was only in clones of the same “fund-capturing” model.

That’s why, when the dot-com boom arrived, many people started betting on online stores, with the idea that they would only buy made-to-order things and on a large scale, meaning they would maximize the flow of money to compensate for commercial margins that were at zero or even negative. That was a losing bet in most cases. Business was slow to grow, and when your business is finance, time is money. But, with the perspective of scale, some would invest in successive rounds among the better-placed. The circus of “risk capital” had begun.

Excess scale, fed by rents and a financial system decoupled from production is the origin of the current crisis. We feed back into the system every time we buy at a big chain distributor, or pay an oligarchical provider of energy, telecommunications, or basic goods. Maybe, currently, it works out to be a little cheaper to buy from them, but have they really improved our quality of life?”

This is drivel – random observations that are largely incorrect and don’t tie back to how firms make money.

Has the author ever looked at the income statement of a big box retailer? Profit on selling products is their primary source of profit, not investment or interest income. Products are cheaper at larger chains largely due to economies of scale in manufacturing, distribution, and retailing – i.e., less hours and dollars of labor and other costs per dollar of product sold.

Similarly, the marginal cost of putting one more passenger on a plane or one more guest in a hotel is extremely close to zero if that plane seat or hotel room would otherwise be empty.

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WRITTEN BY

Michel Bauwens

Michel Bauwens is the founder and president of the P2P Foundation and works in collaboration with a global group of researchers in the exploration of peer production, governance, and property. Bauwens travels extensively giving workshops and lectures on P2P and the Commons as emergent paradigms and the opportunities they present to move towards a post-capitalist world.
In the first semester of 2014, Bauwens was research director of the floksociety.org which produced the first integrated Commons Transition Plan for the government of Ecuador, in order to create policies for a 'social knowledge economy'.
In January 2015 CommonsTransition.org was launched. Commons Transition builds on the work of the FLOK Society and features newly revised and updated, non-region specific versions of these policy documents. Commons Transition aims toward a society of the Commons that would enable a more egalitarian, just, and environmentally stable world. He is a founding member of the Commons Strategies Group, with Silke Helfrich and David Bollier, who have organised major global conferences on the commons and economics.